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IBM meets estimates
October 17, 2000: 11:47 p.m. ET

Computer maker's earnings meet target, but revenue falls short
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NEW YORK (CNNfn) - Computer hardware, software, and services giant IBM reported third-quarter net income that was in line with analyst estimates, although its revenue fell short of forecasts.

The Armonk, N.Y.-based company reported after the market closed Tuesday that its third-quarter net income rose to $2 billion, or $1.08 per share, from $1.8 billion, or 93 cents per share, in the same period last year. The earnings per share number was even with the mean analyst expectation, according to First Call.

The revenue shortfall, combined with operational problems within IBM's software business, caused the company's stock to decline $13 to $100.62 in after-hours trading on Instinet. But shares recovered slightly, trading around $101 on Instinet at 10:30 p.m. ET Tuesday.

IBM shares were down 5.1 percent in overseas trade Wednesday on the Tokyo Stock Exchange's foreign company section.

Third-quarter 1999 results included an after-tax benefit of $63 million, or 3 cents per share, from a gain on the sale of the IBM Global Network, charges related to acquisitions, and other one-time charges. Excluding that 3-cent per share benefit, IBM's third-quarter earnings per share grew 20 percent from the same period in 1999.

IBM's (IBM: Research, Estimates) revenue increased a weak 3 percent to $21.8 billion from $21.14 billion in last year's third quarter. Revenue was up 6 percent when measured in constant currency terms. While revenue growth was slower than IBM and analysts had expected, it was the first quarter in 2000 in which the company's revenue increased from the comparable period last year.

"This was a solid quarter, with earnings per share up 20 percent and an acceleration of revenue growth relative to the first half of the year," said IBM Chairman and CEO Louis Gerstner, Jr. in a statement.

"We would like to have seen more revenue in the quarter, but we were held back by three items," Gerstner said. "First, demand for our microelectronics products -- from both outside customers and internal IBM customers -- far outstripped our ability to supply components. Second, the upcoming release of our new high-end server slowed demand for the System/390 family of servers. Finally, parts of our software business slowed unexpectedly in September."

"On a positive note, our services business continued to overtake the Y2K pause that pressured the first half of the year," Gerstner added. "Our PC business rebounded strongly, with particularly good demand for our server and ThinkPad products. In addition, our business in Asia continued to grow strongly."

IBM's chief financial officer, John Joyce, said on a conference call that the company's fourth-quarter revenue growth should be stronger than in the third quarter and that IBM still aims to meet the consensus fourth quarter earnings per share estimate of $1.48

In a research note issued before the earnings were released, Bear Stearns analyst Andrew Neff estimated that IBM's third-quarter revenue would be $22.8 billion.

"Our expectation is that we are looking at upcoming good quarters for IBM," Neff said before the earnings were released, noting that the company's personal computer business is going from losses to profits, and that its mainframe business is entering a new product cycle.

Personal computers turned profitable

IBM's personal computer business, which accounts for about 20 percent of total sales, became profitable in the third quarter after a long period of losses. The company achieved profitability in PCs by abandoning the retail channel, selling PCs only through its Web site, and by reducing overhead costs in its PC operation.

The company's total hardware revenue was $9.5 billion in the third quarter, an increase of 4 percent (6 percent at constant currency) compared with last year's third quarter. Demand was strong for IBM's RS/6000 Web servers. Revenue from AS/400 machines declined because of supply shortages, IBM said.


Earlier this month, IBM introduced its new mainframe line, called the eServer zSeries 900, where the "z" stands for "zero downtime." The expected transition to the zSeries 900 slowed sales of IBM's previous System 390 mainframe.

Storage revenues were mixed, with high-end disk drive revenue, led by Shark, up strongly year-over-year, while hard disk drive revenue declined by $100 million. Microelectronics revenue grew strongly, the company said.

Software was disappointing

IBM's software results were more disappointing than its hardware performance. Software revenue declined 3 percent in the quarter (up 1 percent at constant currency) to $2.9 billion. IBM's Joyce attributed the poor performance to the software sales force failing to close contracts in September and a shift in the systems management software market that hurt IBM's Tivoli division. Tivoli's revenue dropped 13 percent in the quarter, and employee attrition within Tivoli has been as high as 25 percent, Joyce said.

"There was a lot of business in the pipeline, but we simply failed to close contracts," Joyce said on a conference call.

Software is very important to IBM's profitability because its gross margin on software is 81.2 percent, versus 27.9 percent for hardware.

Revenue from IBM Global Services, the company's consulting and systems integration business, grew 4 percent (8 percent at constant currency) in the third quarter to $8.2 billion, with continued strength in the Asia/Pacific region, particularly in strategic outsourcing. Revenue from Global Financing increased 11 percent (14 percent at constant currency) in the third quarter to $859 million.

IBM closed Tuesday at $113.62 per share, up $2.50. Back to top


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